Written by

Jim Collar

Post-Crescent staff writer

Cigarette tax revenue by year in Wisconsin (in millions)

Tobacco control advocates praise cigarette taxes as a moneymaker for states and a solid incentive for smokers to kick the habit.

But experts say recent tax trends have had an unintended consequence: Sharp price hikes are creating an illegal market in which moving untaxed or low-tax cigarettes to high-tax states can yield huge profits.

"It's like the prohibition of alcohol, but it's prohibition by price," Michigan researcher Michael LaFaive said. "It's become so expensive that it's like it's illegal and with all of the parallel consequences."

Federal officials say tobacco trafficking has been on the rise an increasing number of states turn to tobacco taxes as means to pull in additional revenue. Wisconsin joined that trend with two recent increases that brought the tax on cigarettes from 77 cents to $2.52 per pack.

Disparity in taxes across the country forged opportunity for illegal profits, and federal authorities have taken notice.

The Bureau of Alcohol, Tobacco and Firearms averaged about 40 annual investigations into tobacco trafficking prior to 2003. Since 2003, the bureau has averaged 131 investigations per year, the ATF reports.

The issue has touched the Fox Cities.

In 2009, a search warrant served at a Menasha home yielded thousands of packs of untaxed cigarettes. And last year, an Appleton man was fined in Brown County for selling untaxed cigarettes at a Green Bay convenience store.

Concern over untaxed sales goes beyond state coffers.

"They are not just cheating government," said Appleton convenience store owner Hardeep Arora. "They are trying to kill the smaller businesses in the community."

The ATF cited the disparity in taxes between Virginia and New York City as an example of the potential, illicit profit margins.

The same pack of cigarettes that sells for $4.50 in Virginia would sell for about $13 in New York. Smuggling a single truckload could yield profits in excess of $4 million.

U.S. Sen. Herb Kohl, D-Wis., sponsored a bill that was signed into law last year aimed at curbing illegal sales. The law increased reporting requirements for interstate tobacco sellers and penalties for violators.

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"The cost of tobacco smuggling to Americans is not merely financial," Kohl said in a 2010 statement. "Internet tobacco sales have been used by terrorist and organized crime groups to raise millions of dollars to support their illicit activities."

Wisconsin not immune

A Wisconsin Comprehensive Cancer Control Program report in February pointed to Internet sales as one of several possible contributors to a disparity in which sale of legal, taxed cigarettes fell 24 percent while the prevalence of adult smoking didn't significantly change.

Some online tobacco sellers make it clear they're in the business of helping smokers bypass high taxes.

"All orders are processed and shipped from out of the U.S.," one site says. "Therefore, we don't report tax or customer information to any government agency or other entity."

Michigan's Mackinac Center for Public Policy estimated in a 2010 report that cigarettes smuggled into the state made up more than a quarter of all packs purchased in Wisconsin in 2009. The report, co-authored by LaFaive, suggests smuggling in Wisconsin grew along with the state's 2008 and 2009 tax hikes.

Stephanie Marquis, spokeswoman for the state Department of Revenue, said retail sale of illegal cigarettes in Wisconsin ebbs and flows by year. In fiscal year 2009, the department seized just 763 packs of cigarettes. In the previous year, it seized just more than 12,000.

In general untaxed cigarettes aren't often found in stores checked by the agency.

"We definitely keep our eyes open, but we really haven't seen it to be an issue in Wisconsin," Marquis said.

Statistics, however, show Wisconsin smokers are working around the tax, and in large numbers, LaFaive said.

Estimates in the Mackinac report were derived based on a statistical model that compares legal, paid cigarette sales with state smoking rates.

The study estimated that 11 percent of cigarettes consumed in the state in 2009 entered Wisconsin in the form of casual smuggling, which includes individual smokers that head out of state for personal-use purchases.

Wisconsin's borders could lend themselves to temptation.

By crossing the border into Illinois, Wisconsin smokers would save $1.54 in taxes. Iowa's cigarette tax is $1.16 cheaper while Minnesota's is 94 cents less than Wisconsin's.

In 2006, Wisconsin ranked 18th in the country for smuggling as a percentage of cigarettes consumed, according to the study. Wisconsin jumped to 11th in the country in 2009, the center reports.

LaFaive contends tax increases aren't as lucrative as states believe.

Wisconsin's tax revenues serve as an example.

A January 2010 report from Wisconsin's Legislative Fiscal Bureau lowered expected cigarette tax collections for the current budget by $92 million. The bureau's revision cited lower-than-expected sales. The bureau also adjusted to account for expected sales changes brought by the state's indoor smoking ban.

There's another reason, LaFaive argues.

"They never reach their goals because of the smuggling," he said.

Investigations hit close

There are examples of untaxed cigarettes changing hands in the Fox Valley.

In August 2009, Menasha police and the state Department of Revenue served a search warrant at the home of convenience store owner Satnam Gill on suspicion he possessed untaxed tobacco products. The revenue department seized nearly 10,000 packs of untaxed cigarettes, more than 1,300 cans of moist snuff, more than 2,000 cigars and more than 340 other packages of untaxed tobacco, records show.

Calumet County prosecutors charged Gill, who owns several Fox Valley gas stations, with attempting to evade Wisconsin tobacco taxes. The charge, however, was later dismissed as part of a plea agreement. Gill pleaded no contest in another case of having made liquor sales without a licensee present at one of his stores.

Gill was fined $788 in 2009 on that violation, court records show.

In another case, Appleton's Kashmir Gill was fined $1,370 in Brown County. The fine was issued in November for selling untaxed tobacco obtained from an Illinois distributor at his Green Bay convenience store, according to the revenue department.

Arora said resolution of those cases illustrates another problem. He supports stronger penalties that would remove temptation for store owners to evade the tax.

If smokers get word that a store is selling cheaper cigarettes, they'll take their business there.